Cryptocurrencies have bull and bear periods that aren’t directly tied to economy-wide inflationary disturbances. Adding crypto assets to a traditional portfolio can enhance the expected total return, albeit at the cost of increased volatility. There’s the possibility of substantial price fluctuations within short time frames, so that you can lose some or all of your investment. Volatility is a fundamental quality of the cryptocurrency market, but it shouldn’t be viewed as a barrier. You can navigate market fluctuations with confidence and a well-structured accumulation plan.
Cryptocurrency prices can change daily, and sometimes, even more often than that. Research has shown that major cryptocurrencies, such as Bitcoin and Ethereum, experience average daily fluctuations of 2-4% because there is no central authority regulating the pace of trading. Understanding dynamics in cryptocurrency prices is critical if you’re considering trading or investing. You’re looking to profit from price swings, so recognizing real-time market movements and investor sentiment can help you make more informed decisions.
There’s no way to know for sure which cryptocurrencies will go up or down in value. However, you can mitigate uncertainty by gathering and analyzing data or seeking expert advice. Without further ado, these are the factors that can impact cryptocurrency prices:
Market Capitalization
Market cap represents the aggregate value of all the cryptocurrency units that have been issued and are in circulation. It’s calculated by multiplying the value of an individual token by the number of coins on the market. Cryptocurrencies are classified by size – e.g., small-cap, mid-cap, or large-cap. The size of the market cap can help you make decisions about the risk profile of an asset, its potential for long-term growth, and its market dominance. Large-cap cryptocurrencies, such as Bitcoin or Ethereum, are generally considered safe investments.
Mid-cap cryptocurrencies are more volatile, but they offer more stability compared to small-cap cryptocurrencies. Traders often look to mid-cap coins like Solana, Polkadot, or Chainlink to predict growth potential. Many investors find them appealing because they have sufficient market presence to stand out and offer ample opportunities for high-reward trading. Small-cap cryptocurrencies have less exchange support, lower volume, or both. Assets like Pepe or MIND are characterized by higher risk and reward. If you decide to invest in this segment, do thorough research.
Node Count
Without nodes, you couldn’t use the blockchain for peer-to-peer transfers or executing smart contracts. Each blockchain is managed by a decentralized network of multiple nodes, whose primary function is to maintain the consensus of the public ledger. Node count is the number of active wallets holding a specific coin. The number of unique addresses active in the network, whether as senders or receivers, indicates community sentiment, which guides the direction of the crypto project. A coin with more nodes is less volatile. More nodes indicate a larger, more decentralized network.
Supply And Demand
The more units of a cryptocurrency there are, the lower the price per unit, as more tokens are available for trading. When there’s a low circulating supply and high demand for a particular coin, its value tends to rise. If the cryptocurrency market is inefficient due to conservatism bias, prices will rise until supply and demand reach an equilibrium. By burning tokens, blockchain projects create scarcity, which can lead to an increase in the value of the remaining coins.
Demand for cryptocurrency hinges on general market sentiment, which is the overall attitude or emotional tone of investors and traders regarding a specific asset. Needless to say, when sentiment is optimistic (e.g., due to institutional adoption or favorable regulation), more people want to buy cryptocurrency, pushing the price up. Conversely, negative sentiment can trigger a bear market by prompting investors to sell their holdings, which pushes prices lower.
Competition
When examining competition between cryptocurrencies, it becomes apparent that some assets lose value and fail to recover, while others maintain their value for an extended period. There are winners and losers. More than 15 million cryptocurrencies exist, but most of these are either inactive or discontinued. When multiple tokens solve the same problem (e.g., privacy, scalability, etc.), the market share splits, reducing demand for any single coin. By way of illustration, when Solana gained popularity in 2021 due to interest in NFTs, it captured attention and market capitalization from Ethereum.
Bitcoin, the first and largest cryptocurrency network, can be replaced by any competitor. For several years, there’s been speculation that Ethereum might “flip” Bitcoin. ETH could eventually surpass BTC in market capitalization because it offers a flexible platform for innovations in decentralized finance (DeFi), non-fungible tokens (NFTs), and smart contracts. AI tokens are steadily gaining momentum and may soon become one of the key assets on the market. Bittensor, for instance, transforms machine intelligence into a tradable commodity.
Mass Adoption
Cryptocurrency’s primary source of value lies in its restricted supply and increasing demand, as well as its progression towards mainstream adoption. As more people and businesses start using a token for transactions, investments, or as a store of value, the overall demand increases. The worth of a token is often tied to its network. More precisely, the more users it has, the more valuable it becomes. Every additional user contributes to the blockchain’s resilience. With mass adoption, trading volumes increase, leading to greater liquidity.
Regulation From Central Authorities
Detailed rules or directives created by an authority, such as a government agency, can have a significant impact on cryptocurrency prices, both in the short and long term. Clear regulations enhance investor confidence and foster widespread adoption, ultimately driving price appreciation. By contrast, stringent policies can introduce uncertainty, contributing to short-term volatility. In the US, the Trump administration positions itself as an ally to the cryptocurrency industry by supporting the responsible growth and use of such assets.
Final Thoughts
A cryptocurrency may be overvalued or undervalued. An overvalued coin is one whose current price exceeds what its fundamentals would suggest, whereas an undervalued token trades below its intrinsic potential. It’s common to see price predictions, but you should be cautious about anyone claiming they know the future price of any asset.
